Does Fair Value Accounting for Non-Financial Assets

Does Fair Value Accounting for Non-Financial Assets Pass the Market Test? Hans B. Christensen and Valeri V. Nikolaevï€ ª The University of Chicago Booth School of Business 5807 South Woodlawn Avenue Chicago, IL 60637 Abstract: The choice between fair value and historical cost accounting is the subject of longstanding controversy among accounting academics and regulators. Nevertheless, the market based evidence on this subject is very limited. We study the choice of fair value versus historical cost accounting for non-financial assets in a setting where market forces rather than regulators determine the outcome. In general, we find a very limited use of fair value accounting. However, the observed variation is consistent with†¦show more content†¦Evidence from the US prior to 1940 is provided in Fabricant (1936) and ARB (1940). Evidence from Australia is provided in Whittred and Chan (1992), Brown et al. (1992), Easton et al. (1993), Cotter and Zimmer (1995), and Barth and Clinch (1996, 1998). Evidence from the UK is provided in Amir et al. (1993), Barth and Clinch (1996), Aboody et al. (1999), Muller (1999), and Danbolt and Rees (2008). 1 managers have stronger incentives to respond to market demands and commit to the accounting treatment that maximizes the value of the firm (i.e., is more efficient).2 We study valuation practices for arguably the most controversial (non-financial) asset groups: property, plant and equipment (PPE), investment property, and intangibles. Out of the twenty-nine European countries that mandated IFRS from 2005, we select the United Kingdom (UK) and Germany because they have the largest financial markets in Europe and are historically at opposite ends of the spectrum in terms of using fair value accounting under the local GAAP. Specifically, for non-financial assets, German GAAP allows only historical cost accounting, whereas UK GAAP either allows (for PPE) or mandates (for investment property) fair value accounting. As a result, IFRS expands the available valuation practices in both the UK and Germany. Indeed, under IFRS, both fair value and historical cost are allowed for PPE and investment property; and, if an activeShow MoreRelatedUniform accounting standards produce uniform financial reporting. Discuss and evaluate the above statement in the context of the International Financial Reporting Standards (IFRS)1064 Words   |  5 Pagesidentify what the phrases â€Å"accounting standards† and â€Å"financial reporting† refer to. Accounting standards refer to the accounting methods used in an accounting system like the IFRS. 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